Public Private Partnerships in India: Article Analysis

Introduction:

Development of infrastructure is a precondition for the economic growth of a country. Increasing demand for quality infrastructure can only be met with robust investment, proficient project management and technological advancement.

To meet these requirements, governments are utilizing the capabilities of the private sector in a big way.

Public–private partnerships (PPP) have become the preferred mode for the construction and operation of infrastructure projects, both in developed and in developing countries.

As most governments in emerging economies are facing fiscal and capacity constraints, PPP provides a way for them to bridge the gap in infrastructure investment.

PPP not only brings in additional capital but also enables both public and private sectors to bring to the table their own experiences and strengths, resulting in efficient development of infrastructure and service delivery.

The PPP mode, however, comes with its own set of challenges since attracting private investment is not easy. The private sector not only requires an investor-friendly regulatory environment, but also returns on investment.

The Government of India (GoI), therefore, has been focusing on the development of enabling tools and activities to encourage private sector investments in the country through the PPP format.

Background:

In India, the periodfrom mid 1990s to 2004 marked the inception of PPPs, with transport and power being the focus sectors. The country however experienced limited success due to absence of a mature PPP framework.Subsequently during2004-12, with the government laying foundation for a mature PPP framework, by formulating guidelines and standardization of documents for PPP projects, the country experienced a spurt in award of PPP projects.

As per the latest available data from Ministry of Finance, 1,539 PPP projects have been awarded so far in India. Out of these, about 50% are currently in operational stage, while others are either scrapped or are under different stages of implementation.

Sector-wise break-up shows that transport sector accounts for 58% of the these projects, followed by energy sector with 24%, while social and commercial infrastructure sector accounts for 9% and water & sanitation for the balance 8%.

The Evolution of PPP in India:

However with the absence of a robust PPP enabling ecosystem, i.e. „twin balance sheet problem‟, paucity of credit from alternative sources, lack of asuitable framework for dispute resolution,and with the dearth of bankable PPP projects, a significant number the projects awarded during 2004-12 period failed to take off and the private sector investments witnessed considerable decline thereon, thereby further miring India‟s PPP ambitions.

Also, given the federal structure of India, and in the absence of a unified PPP law or policy and a national level PPP institution, the framework of PPP in India remains heterogeneous.

Only about 32% of the projects are implemented by the Government or its agencies, while the remaining are implemented by theState governments.

This emphasizes on the importance of State level policy and governance framework in overall success of PPP in India. In terms of number of operational PPP projects, States like Gujarat, Madhya Pradesh, Rajasthan, Karnataka and Maharashtra are much ahead of others while States like Tamil Nadu, Punjab and Uttar Pradesh can be considered progressing.

Some State governments have even formulated laws and policies and set up the necessary institutional structures for streamlining PPPs.

Success of PPP to a large extent depends on optimal risk allocation among stakeholders, environment of trust among stakeholders, robust institutional capacity to undertake grooming and implementation of PPP projects.

Further to foster successful implementation of a PPP project, a robust PPP enabling ecosystem including liquid and diversifiedfinancial institutions;sound regulatory and arbitration framework;mature developers and experienced consultants etc. is also essential.

Common forms of PPP model in India:

While the preferred forms of PPP model are the ones where the ownership of underlying assets remains with the public entityduring the contract period and the project gets transferred back to public entity on contract termination, the final decision on the form of PPP is determined using the Value for Money Analysis.

Some of the commonly adopted forms of PPP include management contracts, build-operate-transfer (BOT) and its variants — design-build-finance-operate-transfer (DBFOT) and operate-maintain-transfer (OMT).

In such contracts, most or all of the operations and maintenance of a public facility or service is given to the private sector. The sectors meant for such form of PPP models include water supply, sanitation, solid waste management, road maintenance, etc.

Modified design-build (turnkey) contracts:

In traditional design-build (DB) contract, the private contractor is paid a fixed fee after the completion of the designing and building phase. These contracts yield benefits in the form of time and cost savings, efficient risk-sharing and improved quality. The turnkey approach with milestonelinked payments and penalties or incentives can be linked to these kinds of contracts.

BOT models:

Under BOT contracts, the responsibility for construction and operations rests with the private partner,while ownership is retained by the public sector. The BOT model and its variants are the most common form of PPP models used in India, accounting for almost two-thirds of PPP projects in the country. The two major forms of BOT models are:

User-fee-based BOT model: commonly used in medium to large-scale PPPs for the energy and transport subsectors (road, ports and airports)

Annuity-based BOT model: commonly used in sectors/projects not meant for cost recovery through user charges, such as rural, urban, health and education sectors •

Lease contracts:

Under leasing agreements, assets are leased, either by the public entity to the private partner or vice-versa. Build Lease Transfer (BLT) or Build-Own-Lease-Transfer (BOLT) or Build-Transfer-Lease (BTL) contracts have been used in India for greenfield projects, which last for 10 to 15 years.

Concessions:

Under concession agreements, the responsibility for construction and operations rests with the private partner, while ownership is retained by the public sector. Concession contracts are generally for 20 to 30 years, and the private operator is responsible for all capital investment.

Build own-operate-transfer (BOOT) contracts:

Under BOOT, the private partner has the responsibility of construction and operations. Ownership is with the private partner for the duration of the concession — generally 20 to 30 years — after which it is transferred to the public sector.

While there do exist build-own-operate (BOO) models, they are not supported by the GoI due to their finite resources and the complexities in imposing penalties in case of non-performance and estimation of the value of underlying assets in case of early termination. Furthermore, the GoI does not recognize service contracts, engineering procurement-construction (EPC) contracts and asset divestitures as PPPs.

PPP policy framework:

Significant growth in the number of PPPs in the past 15 years has made India one of the leading PPP markets in the world. As a result, a PPP eco-system has developed, and currently it comprises institutions, developers, financiers, equity providers, policies and procedures.

GOI undertaken some noteworthy steps to strengthen the PPP framework and the enabling ecosystem in India.

Formulation of guidelines for new innovative PPP models, with due consideration to the extant risk outlook and investor appetite, like monetization of publically funded highway projects worth ~Rs. 35,600 crore under Toll-Operate-Transfer Model (ToT) and construction and expansion of over 60 highway projects under Hybrid-Annuity-Model (HAM).

With implementation of PPP models like HAM & TOT, the Government has optimally taken over the project implementation risk and thereby revived the interest of private players and financial institutions in PPP projects in the road sector to a considerable extent.

Further the Government has liberalized the exit policies for concessionaires to free-up equity for reinvestment into new projects; approved the policy of railway station development through PPP and is currently in the process of formulating suitable PPP policy for newer sectors and asset classes.

Some of the other measures include, setting up of National Infrastructure Investment Fund (NIIF) to channelize foreign institutional funds into infrastructure; introduction of PPP component in new metro policy; amendment in the Arbitration and Conciliation Act, 1996 to make dispute resolution more cost effectiveand time-bound; Rs.2.11 lakh crore plan to recapitalize public-sector banks aimed at reviving bank-lending; and introduction of ease of doing business (EODB) state-level ranking, to help the Government to push through reforms in sectors that are primarily State subject.

As a result of these measures and more, the implementation of languishing and newer projects has been considerably put back on track. In a recent study by the rating agency ICRA, it has been highlighted that infrastructure companies, especially the ones with exposure to the airport and the highways sectors, have started witnessing an improvement in their operational and financial performance.

Further, India has also managed to perform significantly well with its EODB World Bank ranking rising to 77 (out of 190 nations)from 100 a year earlier,and with India‟s sovereign Moody‟s credit rating getting upgraded to Baa2 with „Stable Outlook‟ from Baa3 Positive.

What More to be done:

A lot has been done, but a lot more still needs to be done. Going forward, the Government needs to undertake more concerted efforts to revive the credibility of PPP framework and build capacity within various public institutions for PPP implementation.

These may include implementation of some of the key recommendations of the Kelkar Committee Report including setting-up of national level PPP institution,a dedicated PPP tribunal, and a formal framework for post award contract renegotiation.

Undertaking these measures shall send strong signal to the market about the commitment level of the nation to overall PPP framework.

Further it is imperative for the Government to push PPP pilot projects in newer sectors, along with formulation of newer or revision of existing Model Concession Agreements (MCAs),to ensure replicability.

A mature PPP framework, along with a robust enabling ecosystem shall enable the Government to accomplish, to a considerable extent, “The Government has no business to do business” and thereby promote private sector investments and participation towards the nation building.